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Sourcing and Procurement

Responsible businesses: Reducing costs by adopting sustainable procurement practices

After overcoming prolonged hesitance in reducing carbon footprint, companies in the years following 2009 became more aware and started adopting sustainable procurement practices. While popular notion perceives that sustainable procurement means reduced savings, in reality, adopting sustainable ways makes complete business sense in terms of delivering cost efficiencies and other value improvements in the long-run.

All the companies that participated in the Disclosure Project (CDP) of 2019 collectively recorded cost savings of $19.3 billion. The report also recorded a 64% surge in response rate on climate change from suppliers in 2018. The progress substantiates the environmental benefits of sustainable procurement and validates the business value it creates for the supply chain.

One of the leading American retail corporations saved $2.4 million a year, just by changing and simplifying their approach to packaging. The corporation saved an additional $26 million annually by installing auxiliary power units in its 7000 add fleet of trucks. Similarly, another world-known business giant in the food and beverage industry reduced energy usage, and thus expenditures, by implementing new lighting systems in its factories based in the US that used 50% less energy and gave 50% more light. The savings for the corporation from this initiative were even greater after installing motion sensors to further optimize the use of energy.

Business Value

Procurement is crucial for any organization and implementing a strategic procurement process helps in establishing close cooperation with local and global suppliers. Therefore, incorporating sustainability as the primary value enabler in the process can build resilience and attract positive behavior from business partners. Adopting a sustainable approach while selecting a supplier can also help in shaping the manufacturing process, as well as internal policies, while reducing business risks, significantly reducing costs, and building competitive advantage in the market.

The global pandemic, even though it exposed the weak links in procurement processes, came as a blessing in disguise. The crisis has brought the benefits of adopting sustainable practices in business processes into sharp focus for sustained long-term growth. According to European Commission’s Green Public Procurement guidelines, organizations predominantly incur costs on products, transportation, IT equipments, lighting, and buildings. Adopting sustainable procurement will ensure that raw materials, water, energy, fuel, etc., are used optimally, elongating the life cycle of precious resources. Such products not only incur reduced waste disposal costs by default, their material input efficiency further slashes the cost attached to end-of-life disposal expenditures. Choosing resource efficient products can reduce the water, energy, and transportation consumption for a company, which further leads to overall reduction in costs.

The benefits do not stop here. Buying sustainable and green products can also reduce expenditure on health and safety measures. For instance, an organization can improve the safety of their employees by opting for non-toxic products, while also reducing the costs associated with purchasing necessary protective equipments, employee insurance, and compensation claims related to accidents occurring within the premise.

Sustainable buying also has a positive impact on operating and maintenance expenditures. Organization can avoid hidden costs (not visible in the initial unit price) connected with the product with responsible purchasing decisions. Just by replacing hazardous materials with environment friendly products, an organization can reduce costs involved in storage, administration, and disposal of toxic materials.

The Future Beckons

Sustainability is not a new concept by any means. It has gained prominence only in the last few years. Clients are demanding it too as awareness has increased regarding the environmental and social impact of ad-hoc procurement practices. Clients are carefully vetting suppliers and giving preference to business partners who have incorporated sustainable practices in their purchasing strategies. Consultancy firm Nielsen reported a 20% growth in sale of sustainable FMCG products between years 2014 and 2018, and forecasted the market to reach $142-$150 billion by 2021, recording a 17% growth within 2 years. As a result, top industry leaders have initiated efforts in integrating sustainable rules into their Procurement and Supply Chain processes.

Sustainable sourcing is a holistic approach and requires a broader view encompassing the entire purchasing process. It is the future of procurement. However, concerns remain if sustainability can be regarded as the most important business metrics and factors for the procurement process yet. Is there a synergy between procurement sustainability and cost reduction?

As of today, several companies continue to perceive sustainable sourcing as an inconvenient investment. But then there are several others who have recorded significant improvement in their bottom line by incorporating simple sustainable practices, such as recycling or cradle-to-cradle initiatives. Such organizations have recorded measurable benefits, including reduced costs, improved product value, better product differentiation, and new revenue streams. Factoring in the bigger picture - the total cost of ownership, environmental and social impact, long- term benefits, and return on investment - 90% of the industry leaders in the Middle East and Europe declared that their core target in post-COVID era will be to reduce costs and carbon footprint, through sustainable practices. Going forward, procurement leadership will have to be persistent in showcasing that achieving cost reduction does not necessarily jeopardize a company’s sustainability objectives, but in fact go hand-in-hand. Permeating this thought industry-wise will be the long-term goal and the driving factor in impacting a sustainable procurement cycle for the future.

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